Putting risk at the forefront of investment decisions
JOBURG- A GOOD way to look at investment risk is to view it as the probability of experiencing a permanent capital loss over a particular time period.
This according to Anet Ahern, the chief executive of PSG Management which is an independent financial services group that extends its services in the Sandton area.
“The word, risk, always evokes an emotion,” said Ahern.
“For some it is excitement at the anticipation of an opportunity or a thrill, while for others it is the fear and anxiety around losing something or possibly getting hurt.”
She explained that when it came to investments, there was an excess of terms relating to risk. “Using this framework, one would then put risk at the forefront of investment decisions,” she said.
Ahern’s gives her top five reasons for putting risk first in an investment process:
1. Protecting the base
One needs to invest with a margin of safety, which means making sure the investment and associated risks are understood, well-researched and that the price is cheap enough given the potential upside and downside.
2. Carefully consider non-ideal outcomes
Be prepared to make changes as a non-ideal scenario unfolds and rectify the situation.
3. Diversification reduces risk
This is essential to decrease the concentration of risk associated with having too many eggs in one basket.
4. Be fearful when others are greedy
Putting risk at the forefront of your investment process puts you in a better position to buy when others are fearful and sell when they are greedy.
5. Be a custodian
Putting risk first means that a manager should be a custodian of the investor’s investments and preferably manage their funds as if they were managing their own money. It becomes a partnership as opposed to an exercise in finding something you hope someone else will buy from you at a higher price.
Details: www.psg.co.za
